Buying a home is probably the most expensive purchase you will ever make. Aside from putting money down, you will need to make monthly mortgage payments that will cost $1,000 or more depending on where you live. You will also need money for home insurance, property taxes, maintenance and renovations. To top things off, you will most likely deal with rising home prices as you save up to make your down payment.
The Current State of the Housing Market
The bottom line is owning a home continues to rise in the United States. Another roadblock is the cost to rent a home continues to rise as well. Although home values took a significant hit during the 2008 housing crisis, most markets throughout the country regained all of that value back and more.
Homes that are affordable in relatively inexpensive markets are in short supply. Additionally, economists and housing experts believe home prices will rise at a faster rate than inflation, according to reports. The one bright spot regarding affordability is interest rates are trending lower. In early 2019, rates dipped below 4 percent for the first time in several years. Analysts’ believe rates should remain low if the U.S. Federal Reserve keeps its current interest rate policy.
Buying a Home in Today’s Market
The data listed above should not completely deter you from buying a home. If you are ready for homeownership, you need to sit down and find out how much you can afford to pay for a home. However, you need to make sure you consider other costs besides the monthly mortgage payment.
Although you may hear different formulas or percentages for how much you should spend on a house based on your income, Fannie Mae, one of the government-sponsored enterprises who buys mortgages from lenders, recommends that all your debt, including your monthly housing costs, should not exceed 38 percent of your monthly income. So, what exactly are monthly housing costs?
As previously discussed, a mortgage payment is more than paying off the balance of your home loan each month. You also need to pay a portion of your property taxes and home insurance with each payment. You may need to pay HOA fees each month. However, unlike many potential home buyers, you should also include home repairs, regular maintenance, and cheap home insurance as a measure of how much home you can afford.
Statistics show that most homeowners do not have enough money saved for a home emergency. A major roof repair can cost $3,000 to $10,000 depending on the size of the home, and a new air conditioning can cost up to $5,000. Chances are good though you will not need either of these when you first move into your home. However, you should have enough saved if either problem arises. Experts suggest you should save at least six months’ worth of living expenses before you buy a home. If you have very little money left over after you buy a house, you should probably wait.
Renting vs. Buying
If you want to hold off on buying a home until you have enough money saved, you will probably need to rent a place unless you stay with friends or family. However, renting is getting more expensive in the U.S. Fortunately, it is not as expensive to rent a house as it is to buy a house.
Realtor.com reports the cost to own a single-family, primary residence is up 14 percent year-over-year. During that same period, rents are up 4 percent. When you rent, you are not responsible for the maintenance or repairs of the property. Additionally, renters do not need to pay costs associated with originating a mortgage. For example, you will not need to pay closing costs, inspection fees or appraisal fees like you would when you take out a mortgage.
However, the initial cost to move into a rental can get expensive. You will need to pay first and last month’s rent, a security deposit and in some cases pay for a credit report. You will also pay for prorated rent from the day you move into the rental to the end of that month.
The bottom line is millions of otherwise well-qualified people are unable to buy a home due to rising costs. Aside from saving enough money for a significant down payment, people are faced with paying thousands of dollars in additional fees. The silver lining is buying a home is usually a good investment that increases in value over time. Homeownership also gives you stability since you are the owner (as long as you make your payment) and are not restricted to someone else’s rules.